B.C.’s Montney play remains key resource for Encana as company slashes jobs and dividend

CEO Doug Suttles, who is spearheading Encana’s reorganization, says the company’s Montney play in northeastern B.C. is ‘incredible in scale’ and ‘generates very competitive returns on its own.’

Photograph by: Jeff McIntosh
, THE CANADIAN PRESS

Encana Corp.’s drilling operations in northeastern British Columbia will be spared from the dramatic reorganization unveiled by new CEO Doug Suttles that will see deep job cuts and a large reduction in the company’s dividend.

Suttles, formerly an executive with BP, was hired by Encana in June to help prepare the beleaguered company for an environment of low natural gas prices for the foreseeable future.

Suttles said Tuesday the plan to restore “profitable growth” involves realigning its corporate workforce and focusing its capital spending on key resources rich in either natural-gas liquids or oil.

“Unfortunately, the net result of this, is we need a smaller workforce than we have today,” he said. The company will cut about 800 jobs across its 4,200-employee workforce, and close its Plano, Tex. office as it consolidates corporate activities in Calgary and Denver.

And in acting on his promise to review Encana’s dividend, Suttles slashed its quarterly payout to shareholders to seven cents from 20 cents, a level he characterized as “sustainable through a volatile commodity cycle.”

To generate more cash, Encana will also spin off a two-million-hectare land position that it owns in Alberta — known as its Clearwater business — as a separate company, with an initial public offering due in mid-2014.

However, B.C.’s Montney region, which surrounds Dawson Creek, stands out on the other side of Encana’s strategy of focusing 75 per cent of its capital spending on the company’s Top 5 assets.

“It is unbelievable in scale,” Suttles said of the Montney. “It has decades of drilling inventory, a massive resource base and can be incredibly large in our business.

“And it generates very competitive returns on its own, particularly when you realize a good portion of it has joint-venture leverage to it.”

Japanese industrial powerhouse Mitsubishi spent $2.9 billion in 2012 to buy a 40-per-cent stake in one of Encana’s Montney projects. And while Encana plans to spend $500-$600 million in 2014 on drilling in the Montney, Mitsubishi’s investment will draw $100-$200 million in “carrying capital.”

Encana has been active in the Montney for close to a decade and is “definitely an area where we’ve figured out (the geology) and the costs are quite low,” said company spokesman Jay Averill.

And while the Montney’s natural gas reserves are rich in liquids, such as butane, propane and condensate, which can be sold more profitably than dry natural gas, Averill said the dry gas it produces from the basin is competitive in terms of the margins it can earn — even at low prices.

“It kind of fits with the ideal play we’re talking about,” he added. “It has lots of running room (Encana has identified 25 years worth of potential drilling opportunities) and the scale for us to really gain the advantage of running (a) resource-play hub model.”

The hub model involves establishing well pads from which operators drill multiple production wells to feed a production network over a wide area.

In addition to the Montney, Encana said it will also spend money on developing the Duvernay basin in west-central Alberta, where it also has a partner — China’s state-owned PetroChina. Also on the Top 5 list are the DJ Basin in Colorado, San Juan play in New Mexico and the Tuscaloosa Marine Shale in Louisiana.

Encana’s restructuring was applauded by analysts, who welcomed its tighter focus and cost reductions.

“The previous Encana was broken in my view, so this is a bold step in the right direction,” Mason Granger, a portfolio manager who oversees $400 million at Sentry Investments in Toronto, said by email. “In a refocused company, what we need to see now is solid execution on these five core plays that actually delivers returns to shareholders.”

In a note to investors, analyst Greg Pardy of RBC Dominion Securities said Encana’s strategic moves were positive and expected Tuesday but its higher than anticipated 65-per-cent dividend cut from 20 cents per quarter to seven cents would likely create stock price volatility.

And Moody’s Investor Services characterized Encana’s restructuring as “credit positive” in a note to its clients.“Living within cash flow would be a significant positive step forward for Encana, which has typically relied on sometimes significant asset sales and joint ventures to fund negative free cash flow,” Moody’s said.

Since splitting its oil assets off to form Cenovus Energy Inc. in late 2009, Encana has suffered dwindling returns because of low gas prices blamed on a glut of shale gas in North America. Its current output is about 90-per-cent natural gas.Last month, the company — Canada’s largest gas producer — cut five senior executive positions to simplify its organizational structure. It trimmed seven per cent of total staff in the first half of 2013.

Encana’s share price shot up 62 cents, or more than three per cent, in trading Tuesday to close at $19.21 on the Toronto Stock Exchange.

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